Questions & Answers

For backround it would be useful to have read Introduction to International Asset Protection, or to be familiar with the uses and workings of trusts.

St. Gaudens $20 high relief


Taxes Offshore Issues

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Q : Can international financial structures be used to avoid taxes?
A : If you are a U.S. taxpayer, it is a good idea to assume that a relationship with an international financial structures will not generate any tax savings in and of itself unless you have definitive evidence to the contrary – evidence which we do not possess. If you legally configure your business in certain ways, access to a variety of tax savings devices becomes available, and offshore structures can be used to great effect towards that end. In fact, companies making use of just such devices by moving part of their operations offshore – ofttimes controversially, with blustering politicians ranting about “unpatriotic” corporations availing themselves of the tax code’s rules to lessen the government’s cut – have made the news frequently in the last several years. However, this would almost always involve using more than just a single nondomestic structure. Clearly we believe strongly in the asset protection benefits of international diversification. In practice, there is more to consider than just theory. The journey uncovers reasons unforeseen at the outset.

We think that an alternative question, “In internationally diversifying my financial affairs, can I create more of what I am committed to providing to the world?”, deserves an affirmative answer. Properly set up, assets in an international (outside one’s home jurisdiction) structure can grow tax free and then be contributed to persons and causes of your choice, in a greater amount than would be the case without any legal restructuring. This is due to the power of compounding, among other reasons. Going international allows new ways of thinking, and focusing on just whether additional money will pass through one’s hands unnecessarily constrains the thought process.

Q : How can international financial structures be used to actually defer taxes, in practice?
A : There are multiple ways in practice to accomplish this. One example is that you make a loan to an offshore legal entity (the particular type of entity does not really matter) and the loan document is written such that the timing of interest payments prior to the loan’s maturity is within the discretion of an entity manager, and thus the interest is not taxable until it is actually paid to a taxpayer, to the best of our knowledge. The interest owed and the backing assets can build up untaxed until paid out, similar to some annuity products. We address this question further below.

Q : If all that I am really interested in is setting up an offshore nestegg and letting the income accumulate tax deferred, why not just buy an offshore annuity?
A : As of April 7, 1995 the annual income on a fixed return foreign annuity contract is taxable. The benefits of such a strategy have thus been impaired. A foreign annuity can still provide valuable asset protection benefits, but if its income is reported every year then, ipso facto, the annuity’s existence is known and the benefits accruing from privacy are certainly compromised.

Offshore Issues

Q : I have heard about the OECD “Blacklist” and anti-offshore initiatives. What is this and how does it affect WIL’s ability to service and protect its clients?
A : This initiative serves as one example of the ongoing war on financial privacy and freedom. The OECD (Organization for Economic Cooperation and Development) initiative differs in intensity compared to past attacks on people’s privacy and freedom, but is hardly a recent development. The war between the high-tax countries, who see their citizens as cows to be milked (often until their capacity to produce has disappeared), and the international financial havens, who see those citizens as customers, is metaphysically ordained. The intiative is analogous to a gang of arsonists trying to forbid the fire insurance business from exisiting. The essential effect has been to drive many jurisdictions out of the offshore financial services business as we (and they) knew it. “Tax haven,” or “havens” of any kind, are now terms of opprobrium which everyone wants to avoid. There are many news items related to this subject in our Offshore News Digest Archives pages that we suggest you check out to fully acquaint yourself with the issues. Suffice it to say the concerted effort has made our job harder and diminished our clients’ freedom. To our way of thinking it means everyone should redouble their efforts to gain some freedom while they still can.

Some history: In 2000 the 29 industrial OECD nations released a report titled “Towards Global Tax Cooperation” that claimed that low-tax nations are bad for the world economy and identified 35 nations who are guilty of “harmful tax competition”. The plan was to coerce nations practicing “harmful tax competition” to cease this through various economic means. Strong opposition to the initial plan formulation resulted in its evolution into a battle over “information exchange”, determining conditions under which it is legitimate for governments to suspend financial privacy and divulge confidential information to other governments. In the words of a June 2001 quote of a U.S. Treasury Department spokesperson: “The U.S. reiterated our position about refocusing the project solely on the need for appropriate information exchange in order to prevent tax evasion.” In the aftermath of the September 11, 2001 terrorist attacks the rhetoric against offshore privacy intensified further – of course using the pretense of defunding terrorists – to force financial account holder disclosures. Major discoveries of tax evasion in 2009 involving large Swiss and Liechtenstein banks gave further ammunition to the OECD states which was very effectively used in their war on offshore havens. The dust is still settling.

In the U.S. empire’s hubristic dotage its government has largely dispensed with the nominal consensus building of old and flat out dictated to everyone else how it wants things to work. Using the leverage the Federal Reserve controlled international funds wiring system, which comes courtesy of the U.S. dollar still being the world’s reserve currency, it simply threatens to withhold access to that system from any country or institution that does not comply with its orders. For instance, Switzerland had to abandon its ages-old commitment to privacy in the face of that threat. This has set in countervailing forces in motion. We suspect the world will look very different in the not-too-distant future, but that is the situation now so everyone has to deal with it.

The battlefront between the seekers of and aggressors against liberty will never be static. It has not been a good idea for quite some time now to rely on secrecy to keep financial activities private. We expect the job of protecting client interests to continue to become more difficult. If we begin to suspect that the jurisdictions and strategies we favor are no longer adequate in defending the interests of our clients we have contingency plans. The alternatives would be more expensive to use, and thus are not favored until that happens.

Q : You (and others) mention other offshore structures such as International Business Corporations (IBCs). Where can I get in touch with a supplier of these structures?
A : We can supply IBCs or Foundations, upon the request of a client, at a very reasonable price. Other services offered are enumerated on this page.

Q : How safe is it to put money into offshore banks and brokerages?
A : In the business sense of the question, as long as funds are put into large, well-known banks and brokerages, we think the not altogether satisfactory answer is: “Fairly safe if you choose your institution wisely.” Most instances where funds suddenly (nonfraudulently) evaporate occur when the funds were invested in smaller, more obscure entities. Outside the U.S. there are no insurance funds like FDIC or SPIC, and thus no compensation mechanisms that kick in if, say, a bank or brokerage’s asset values suddenly shrink due to bad loans or investments or a liquidity problem. In the international financial arena, one should not act is if there is some agency in the background who will shield one from one’s misassessments – there is no such agency. That is why we will carefully assess the strength of any financial institutions that we contemplate using for the safekeeping of funds.

We submit an upside to the lack of an FDIC-like entity for offshore banks: If an offshore bank’s management intends that the bank survive and prosper then they must earn the trust of their depositors by prudently managing their balance sheets and businesses, by being careful about to whom they make loans, by effectively managing the maturity of the loan portfolio versus their deposits, by maintaining liquidity in order to service the cash demands of their depositors, and by showing they can withstand the effects of financial dislocations. They do not have the dubious benefit of a ready supply of uninformed customers who believe that the government will step in and bail them out if their investment (deposit) proves to have been unwise. The FDIC’s reserves are demonstrably utterly inadequate to make good on the claims it would face in the event of a general financial system liquidity crisis. Surely depositor “bail-ins,” such as those imposed on Cyprus bank depositors in 2013, would be the de facto result. We believe that strong foreign banks, who are used to having to live without the back door of last-resort access to goverment funds, would show themselves to be better prepared for such a crisis than their U.S. counterparts.

It is worth noting that, appearances to the contrary, bank account holders are unsecured creditors of the institution. In practice the deposit-holding bank creditors have been bailed out when banks fail. But that has largely happened in the context of a general financial system that has not been precariously leveraged to the hilt. Governments and central banks pulled out all the stops to stabilize things (and in the process merely coincidentally ... not ... bailing out their crony capitalist financier sponsors) following the world financial collapse of 2008. We have given up predicting that there are no rabbits left in the hats of the fiscal and monetary policy makers, but it sure seems like their tricks have been exhausted. The conclusion, again, is choose your financial institutions wisely. In particular shun those which engage in risky speculation using leverage.

Disclaimer: We are not legal advisors and do not give legal or accounting advice. We recommend that you consult with a competent professional advisor when appropriate.